by Calculated Risk on 5/16/2010 08:51:00 AM

Professor Shiller is worried about social psychology (I tend to be much more data driven).

From Robert Shiller in the NY Times: Fear of a Double Dip Could Cause One

[T]here is still a real risk of a double-dip recession, though it can’t be quantified by the statistical models that economists use for forecasts. Instead, the danger stems from the weakness and vulnerability of confidence — whose decline could bring markets down, further stress balance sheets and cause cuts in consumption, investment and local government expenditures.
...
From 2007 to 2009, there was widespread concern about the risk of an economic depression, but that scare has been abating. Since mid-2009, it has been replaced by the milder worry of a double-dip recession, as a count of Web searches for those terms on Google Insights suggests. And with that depression scare still fresh in our minds, sensitivity to the possibility of another downturn remains high.

Shiller continues:

I use a definition of a double-dip recession that doesn’t emphasize the short term. Instead, I see it as beginning with a recession in which unemployment rises to a high level and then falls at a disappointingly slow rate. Before employment returns to normal, there is a second recession. As long as economic recovery isn’t complete, that’s a double-dip recession, even if there are years between the declines.

It helps to have a clear definition of a "double-dip" as opposed to calling two separate recessions. The two early '80s recession raised this issue, and the NBER argued they were two separate recessions:

Although not all economic indicators had regained their 1979-80 peaks by the summer of 1981, the committee agreed that the resurgence of economic activity in the previous year clearly constituted a business cycle recovery.

Using Shiller's definition, the two recessions in the '30s were a "double-dip", although NBER called them as two separate recessions.

My definition of a "double-dip" is a second economic downturn before most of the major indicators return to the pre-recession levels. These measures would include GDP, real income, employment, industrial production, and wholesale-retail sales. My view is the economy will probably slow in the 2nd half of 2010, but I think we will avoid a double-dip.

And this is interesting:

Since 1989, I have been compiling the Buy-on-Dips Stock Market Confidence Index, now produced by the Yale School of Management. It shows that confidence to buy on market dips has been declining steadily for individual investors since 2009. (The measure is holding steady for institutional investors.) Will individuals continue to support the market, which is now highly priced?

by Calculated Risk on 5/15/2010 07:54:00 PM

From Sharon Stangenes at the Chicago Tribune: Renting what you can't sell

When Ed Amaya put his Oak Park bungalow up for sale in mid-2007, homes in his neighborhood sold in a matter of days, weeks at the most.

"We had some showings; got close to a deal," recalled Amaya. But as the housing market soured, a sale proved elusive. So Amaya agreed to rent it to a family that was not in a position to buy.

"We stayed in that pattern for a couple of years," said Amaya, who expected real estate to rebound. "But guess what? The market got worse."

Like many homeowners in the housing downturn, Amaya became an unintentional landlord by renting out a property he once hoped to sell.

Like so many others, he should have reduced the price!

So many residences are now for lease that there is "a saturated rental market," with more available units than potential tenants, said Jeanine McShea, president of brokerage services for @Properties.

"Many people are renting out property, but most are not making money," said Sara Benson, a principal in Chicago-based Benson Stanley Realty.

My definition of "shadow inventory" are units that aren't currently listed on the market, but will probably be listed soon. This includes REOs, foreclosures in process and some percentage of seriously delinquent loans (some will cure, some are already listed as short sales), unlisted new high rise condos (these properties are not included in the new home inventory report) and homeowners waiting for a better market.

That last category includes all the accidental landlords that we've been discussing for years.

by Calculated Risk on 5/15/2010 02:52:00 PM

From David Streitfeld in the NY Times: In City of Homes That Sit Empty, Building Booms

Home prices in Las Vegas are down by 60 percent from 2006 in one of the steepest descents in modern times. There are 9,517 spanking new houses sitting empty. An additional 5,600 homes were repossessed by lenders in the first three months of this year and could soon be for sale.

Yet builders here are putting up 1,100 homes, and they are frantically buying lots for even more.

Las Vegas is trying to recover by building what it does not need.
...
Some of the demand is coming from families that are getting shut out of the bidding for foreclosures by syndicates that pay in cash, and some is from investors who are back on the prowl.

Land and labor costs have fallen significantly, so the newest homes are competitively priced. Some of the boom-era homes, meanwhile, are in developments that feel like ghost towns. And many Americans will always believe the latest model of something is their only option, an attitude builders are doing their utmost to reinforce.

Many buyers have been frustrated recently trying to buy homes, especially at the low end. They are competing with cash buyers, or they have to endure endless delays with short sales (although the process is improving), and meanwhile the lenders have been slow to foreclose. This has created an opportunity for builders - even though there is no need for new supply in places like Las Vegas.

Click on image for larger graph in new window.

This graph (from this post earlier this week) shows the negative equity and near negative equity by state. The graph is based on the data in the First American CoreLogic Q1 2010 negative equity report this week.

From the report:

Negative equity continues to be concentrated in five states: Nevada, which had the highest percentage negative equity with 70 percent of all of its mortgaged properties underwater, followed by Arizona (51 percent), Florida (48 percent), Michigan (39 percent) and California (34 percent). Las Vegas remains the top ranked CBSA with 75% of mortgaged properties being underwater, followed by Stockton (65%), Modesto (62%), Vallejo-Fairfield (60%) and Phoenix (58%).

The good news for buyers is there are probably many more distressed sales coming.

by Calculated Risk on 5/15/2010 11:30:00 AM

From an intereview in Der Spiegel with European Central Bank President Jean-Claude Trichet: A 'Quantum Leap' in Governance of the Euro Zone Is Needed. A few excerpts:

Trichet: "[I]t is clear that since September 2008 we have been facing the most difficult situation since the Second World War -- perhaps even since the First World War. We have experienced -- and are experiencing -- truly dramatic times."

On buying government bonds of EU countries:

Trichet: Our measures are explicitly authorized by the (EU) treaty. We are not embarking on quantitative easing. We are helping some market segments to function more normally. And, as I said, we will take back all the additional liquidity that we will supply in our Securities Markets Program.

On countries leaving the euro:

SPIEGEL: Would it not be good if a country such as Greece were able to leave the euro area?

Trichet: No. This is excluded. If a country joins the euro area, it shares a common destiny with the other members. There is a need for a quantum leap in the governance of the euro area. There need to be major improvements to prevent bad behavior, to ensure effective implementation of the recommendations made by "peers" and to ensure real and effective sanctions in case of breaches (of the Stability and Growth Pact).

by Calculated Risk on 5/15/2010 08:50:00 AM

From Bloomberg: S&P Cuts to Junk Mortgage Bonds It Rated AAA in 2009 (ht Bob_in_MA, Justin)

Standard & Poor’s cut to junk the ratings on certain securities, backed by U.S. mortgage bonds, that it granted AAA grades when they were created last year ...

The reductions were among downgrades to 308 classes of so- called re-remics, or re-securitizations, created from 2005 through 2009 ...

“The downgrades reflect our assessment of the significant deterioration in performance of the loans backing the underlying certificates,” S&P analysts Cesar Romero and Terry G. Osterweil said in the statement.

Rated AAA last year and now junk ... ratings: what are they good for?